Shady financial advisers will sell mutual funds, annuities, REIT’s, cash value life insurance — basically anything that might make more sense for them (in the form of making a commission) instead of the client.

It’s often touted as a “great investment,” offering things like tax-free money just like a Roth IRA, guarantee of principal, on and on and on.

If you’ve been a reader of the blog, you’ll know I’m a firm believer that in the right situation, a financial product could work, but just like I see annuities being used inappropriately, the same applies to universal life insurance types.

A recent prospective client encounter illustrates that too perfectly.

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Universal Life Insurance Used Wrong

Both husband and wife are currently in their early 40s, and they don’t have a lot in savings.

The husband had a good government job, but was forced to resign, and is currently working part time. They have little to nothing saved in retirement, and much of their past savings had been depleted helping out an ill family member.

Seven years prior, their insurance agent sold them a $1 million term policy (that I totally support), and a $100,000 universal life policy (that I totally do not support).

I asked the clients why they took out the universal life policy to begin with, and their response was that the husband wanted something that would take care of his wife if something happened to him.

The term policy works perfect for this. The universal life also does this, but is MUCH more expensive.

He was paying $101 a month for the universal life policy and $88 a month for the 20-year term policy. If making sure that his wife was taken care of was his goal in taking out both policies, then in my opinion, the advisor fell short. The client could have purchased a much larger term policy and used the difference to start funding their retirement. The agent was trying to sell this policy as an investment for later.

Here’s where it gets even worse.

Diving into the numbers: the client took out the policy in October of 2007, and has been paying $101 ever since. At the end of last month, May 2014, the client had put in a total of $7,949 into the policy.

The total cash value accumulated was $6,000, with a surrender value of $5,900.

How’s that for an investment?

I’m not saying that universal life insurance is a horrible investment, but more times than none, it’s oversold to somebody who doesn’t need it. The husband and wife were not contributing to any retirement plans or IRA’s when they took out the policy, which is something that should have been asked by the advisor.

Instead of putting money into an expensive universal life policy, they should have been funding a 401k or a Roth IRA.

If you’re considering buying a universal life insurance policy, here are the rules you need to follow:

Rules for universal life insurance:

1. You better have an insurance need.

I once encountered a situation where a 26-year-old female, a 26-year-old single female, was sold a $1 million universal life policy. The insurance agent pitched it to her as a guaranteed savings account that was offering somewhere in the 6% to 7% range. She was told that she could never lose her principal, and that she’d be making a great return on her money.

It turns out what she really had was a $1 million universal life insurance policy. She was paying a good chunk per month toward it, and when there happened to be a botch in how she was paying for her quarterly premium, it prompted her to investigate what exactly she had, because in the short term that she’d had it, she hadn’t seen this 6% interest that the agent had spoken of.

After contacting the agent’s home office, she learned the truth. She had been sold a $1 million universal life insurance policy. When she learned that, her immediate question was, why does a 26-year-old woman who’s not married, with no kids, who has $100,000 of student loan debt, need a $1 million life insurance policy?

Of course, the back office couldn’t answer that question and deferred that to her agent. There’s no question that she did not have an insurance need, and therefore had no need for a universal life policy.

2. You also better have term insurance.

It irks me to no end when an adviser or life insurance agent sells universal life insurance as an investment that also has protection. If they are leading in with that, and they haven’t even had the discussion of term life insurance, they are immediately added to my list of the financial advisors I’d like to punch in the face. Term life insurance is dirt cheap, and that is where you need to start before purchasing any type of universal life policy.

To put things in comparison, I purchased a $2.5 million term life insurance policy for $2,500 per year as annual premium. When I started doing some inquiring on a universal life policy for myself, here is what I found.

Keep in mind in my own personal situation, I am unable to put into a Roth IRA because of the income limit. I was looking at a universal life policy as a long-term savings tool as well. (note: the policy I was reviewing was an indexed universal life policy).

If I structured the universal life policy to where I would pay $10,000 per year of premium, and did so for 10 years, that would give me a death benefit of $285,743. The policy offers the ability to accumulate cash value, but the guaranteed rate is 3% before expenses.

By the time I was 60, I could pull a whopping $104,000.65 guaranteed. There are some ties to the market where the value could be much more. If I were to average 5.5%, that total would be $249,365, but as you can see, to have a $285,000 death benefit would take me putting in $10,000 a year for 10 years, and which far exceeds the premium outlay for a term life insurance policy.

3. Roth IRA and/or 401(k) is a must.

If the person pitching you universal life insurance policies uses the phrase “It’s an investment like a Roth IRA,” then why in the heck are they are not suggesting you open a Roth IRA first? A Roth IRA should give you more bang for your buck, and won’t have the high cost of insurance attached to it. The same goes for a 401(k).

Preferably, I would love to see somebody maxing out both the 401(k) and a Roth IRA before they even explore any type of universal life policy. If the person is pitching you universal life insurance and they haven’t even inquired about whether you are putting money into your retirement account or not, you know they are sketchy. Move on quick.

4. You’ve compared the cost of multiple carriers.

In the original case above, where the individual is paying $101 per month for a $100,000 universal life policy, I was able to compare rates and see if they could even pay less than what they’re paying, in case they wanted to keep it.

It turns out I found multiple carriers that were far less than the $101 per month they were paying, from the top life insurance companies in the United States. The best option I found was actually $40 a month cheaper than what they were paying, for a total savings of just under $500 per year.

If you are fully committed to taking on a universal life policy, make sure the person selling it to you has the ability to work with multiple carriers. If they are working for a big box company that can only offer one solution, then you better at least get a quote with somebody else.

Is Universal Life Insurance Really a Ripoff?

The short answer is no. Universal life insurance is not a ripoff, but it had better make sense for what you’re trying to accomplish. For example, I’ve seen these type of policies used for estate planning purposes to pass more onto the heirs of clients. In these cases, universal life insurance makes A LOT of sense.

For the couple that was sold a universal life policy above, I suggested they contact their agent and find out why exactly they were sold the policy in the first place.

Comments | 9 Responses

Hi Jeff, I’m a new listener and catching up on some old podcasts. I’m also an IAR and registered rep. I wanted to ask your thoughts on one type of UL not mentioned. I’ll preface it to say that I agreed with you 100% in the podcast. I generally hate UL policies and have had several clients whose assumed ROR’s were very overestimated and whose policies were set to lapse far earlier than they had been told. So they basically were purchasing really expensive term insurance since the policy ended up having a short life span. I don’t have a lot of experience with IUL’s as insurance isn’t my primary business anyway.
With all that said what are your thoughts on Guaranteed UL policies. In case you’re not familiar they are UL whose cash value disappears within the first 10 years typically, but the death benefit continues to age 90-121 depending on the policy. I definitely do not consider these to be an investment (obviously since the CV goes to 0). I view them more like a lifetime term. From a premium standpoint they are priced more closely to term than whole life. In fact if a company could offer a “lifetime term” I would think it would be very similarly priced. I only sale these when there is an insurance need and typically in face amounts of 50-100k and always suggest covering the additional life insurance need in 20-30 year term. The idea of course is to have final expenses coverage for life.

Mr. Rose As sergeant in the US Army and 50 years old. You look like your in your late 20’s or early 30’s. I talk from pure life experiences. In college, I had two roomates, one had to leave college because his dad got a 10k raise and he could not qualify for financial aid. My other roommate was present in the conversation, and he said, ” I am so glad that my grandfather, invested on a Life Insurance Policy; it has paid for my father’s and my college tuition. It will probably pay for my future son’s as well. So, Mr. Rose tell me any annuity or IRA that doesn’t force you to take the money out. As for the 401K, they have spoken for themselves as many American’s will have to work an extra 10years to regain their loses. I may have not gone to any 50k University and gratuated with a finance major. But one think I do listen to the people who faught and gave their lives to assure our freedom . Even for the individuals that have destroyed the moral statues of this country, due to their pure greed for money.

@ Mark As a Staff Sergeant that served in combat I, too, salute your service. I’m a HUGE proponent of life insurance. That’s why I have a $2.5 million policy on myself. What I’m not a huge proponent of is universal life insurance which I’ve seen misused and mis-sold on more than once occasion.

Any saying universal life insurance is a rip off hasn’t done their home work. Proper homework is done when you study the tax law as it relates to life insurance not ready blog posts that are slanted against it. My agent came to my husband and I several years ago as we where not getting the results in our 401k plan over the past 10-years.
Our agent explained using Indexed Universal Life as a tool instead of a 401k plan. After much reading of several box he recommended and of course pouring over some tax laws relating to these policies should be structured, we went all in. I put into my insurance (IUL) $950 per month and my husband puts in $1,125 in his, we where amazed on how this works for us.

With me as a 38 year young woman and my husband being 41, we are poised to garner much more income at retirement than our 401k plans would have ever churned out. NOT ONE of these agents who lobby against using life insurance as a retirement tool but push mutual funds, 401k’s, etc.. never take into consideration future taxation. Everyone knows taxes will increase, yet most agents seem to push clients into financial vehicles that expose them to possible losses. I believe I’m not a normal client as I’m considered a book worm and engineer type. In the end, using Life Insurance as a retirement tool is the most ideal plan over a 401k any day and year.

Possibly, but what investments were in your 401k? What kind of mutual funds did you have access too?

To say that life insurance is “the most ideal plan over a 401k any day and year” is just absolutely false.

Not to mention that you haven’t see the IUL policy play out yet. I’ve seen several clients that have been in cash value policies for 20+ years (that’s including universal life and whole policies) and they haven’t seen the projected growth that their insurance agent swore they would.

Either way, you should continue to fund your 401k to diversify your retirement income.

I think its really important for consumers to be skeptical whenever going into purchasing something. Its not that difficult to conduct your own research on such things, and it can ultimately help you to manage to avoid wasting money and time.

Universal Life Insurance is borderline rip-off, haha. In all seriousness, I believe term life is a much better deal for most people. Like you mentioned, there are situations where Universal Life insurance could work, but for most people term life is the better choice.

I didn’t know much about insurance and really educated myself when someone tried selling me universal. I was curious about “guaranteed investment.” The idea that I would get annuity payments excited me until I researched further and discovered that’s not what insurance is for. Term is a better way to achieve this to make sure our obligations are met.

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